<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
-----------------
Commission file number 0-11973
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1321492
- ------------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (301) 468-9200
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------------ ---------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
The partnership interests of the Registrant are not traded in any market.
Therefore, the partnership interests had neither a market selling price nor an
average bid or asked price within the 60 days prior to the date of this filing.
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
------
Item 1. Business . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . I-5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . I-6
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . I-6
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . II-2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . II-3
Item 8. Financial Statements and Supplementary Data . . . II-9
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-9
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . III-2
Item 13. Certain Relationships and Related Transactions . III-3
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-3
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . IV-33
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Capital Realty Investors-II Limited Partnership (the Partnership) is a
limited partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on March 23, 1983. On May 6, 1983, the Partnership commenced
offering 50,000 limited partnership interests through a public offering which
was managed by Merrill Lynch, Pierce, Fenner and Smith, Incorporated. The
Partnership closed the offering on June 20, 1983 when it became fully
subscribed.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which is
the Managing General Partner, and current and former shareholders of CRI.
Services for the Partnership are performed by CRI, as the Partnership has no
employees of its own.
The Partnership was formed to invest in real estate, which is the
Partnership's principal business activity, by acquiring and holding a limited
partnership interest in limited partnerships (Local Partnerships). The
Partnership originally made investments in twenty-two Local Partnerships. As of
December 31, 1997, the Partnership had investments in twenty Local Partnerships.
Each of these Local Partnerships owns a federal or state government-assisted or
conventionally financed apartment complex, which provides housing principally to
the elderly or to individuals and families of low or moderate income. The
original objectives of these investments, not necessarily in order of
importance, were to:
(1) preserve and protect the Partnership's capital;
(2) provide, during the early years of the Partnership's operations,
current tax benefits to the partners in the form of tax losses which
the partners may use to offset income from other sources;
(3) provide capital appreciation through increases in the value of the
Partnership's investments and increased equity through periodic
payments on the indebtedness on the apartment complexes; and
(4) provide cash distributions from sale or refinancing of the
Partnership's investments and, on a limited basis, from rental
operations.
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for a discussion of factors affecting the original
investment objectives.
The Local Partnerships in which the Partnership has invested were organized
by private developers who acquired the sites, or options thereon, applied for
applicable mortgage insurance and/or subsidies, and remain as the local general
partners in the Local Partnerships. The Partnership became the principal
limited partner in these Local Partnerships pursuant to negotiations with these
developers who act as the local general partners. However, in the event of
non-compliance with the Local Partnerships' partnership agreements, the local
general partner may be removed and replaced with another local general partner
or with an affiliate of the Partnership's Managing General Partner. As a
limited partner, the Partnership's legal liability for obligations of the Local
Partnerships is limited to its investment. An affiliate of the Managing General
Partner of the Partnership is also generally a general partner of the Local
Partnerships. In most cases, the local general partners of the Local
Partnerships retain responsibility for developing, constructing, maintaining,
operating and managing the project. Additionally, the local general partners
and affiliates of the Managing General Partner may operate other apartment
complexes which may be in competition for eligible tenants with the Local
Partnerships' apartment complexes.
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
Although each of the Local Partnerships in which the Partnership has
invested owns an apartment complex which must compete in the market place for
tenants, interest subsidies and/or rent supplements from governmental agencies
generally make it possible to offer certain of these dwelling units to eligible
tenants at a cost significantly below the market rate for comparable
conventionally financed dwelling units. Based on available data, the General
Partners believe there to be no material risk of market competition in the
operations of the apartment complexes described below which would adversely
impact the Partnership, except in specific circumstances as described in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
A schedule of the apartment complexes owned by Local Partnerships in which
the Partnership has an investment follows.
I-2
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/97 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Arrowhead Apts. $ 3,850,041 Illinois Housing Development 200 40 05/31/01
Palatine, IL Authority (IHDA)
Beech Hill I 2,803,306 Federal National Mortgage 200 39 08/31/98 (4)
Manchester, NH Association (FNMA)/236
Beech Hill II 1,569,806 FNMA/236 120 24 08/31/98 (4)
Manchester, NH
Chevy Chase Park 3,650,567 Metropolitan Savings Bank 232 228 03/23/98 (4)
Centerville, OH (MSB)/236
Country Place I 7,401,586 Maryland Community Development 192 38 08/09/09
Burtonsville, MD Administration Section 221(d)(4)
of the National Housing Act (NHA)
Country Place II 4,485,810 Reilly Mortgage Group/Section 120 24 08/29/00
Burtonsville, MD 221 (d)(4) of the NHA
Four Winds West 987,879 GMAC HUD Insured through Section 62 62 04/14/98
Birmingham, AL 221 (d)(4) of the NHA/Section 8
Frenchman's Wharf II 7,923,103 Department of Housing and Urban 324 31 11/30/98 (4)
New Orleans, LA Development
Golden Acres 1,251,838 California Housing Finance Agency 46 45 12/30/12
Chowchilla, CA (CHFA)
Mercy Terrace 8,602,149 Section 221(d)(4) of the NHA/ 158 157 11/30/03
San Francisco, CA Section 8
The Moorings 3,563,161 IHDA 216 44 05/31/01
Roselle, IL
Orangewood Plaza 1,826,500 CHFA 40 33 --
Orange Cove, CA
Posada Vallarta 14,091,121 Conventional 336 70 02/16/04
Phoenix, AZ
Princeton Community 8,225,644 New Jersey Housing Finance Agency 239 26 07/01/98 (4)
Village
Princeton, NJ
Rock Glen 3,734,507 Section 221(d)(4) of the NHA 241 0 --
Baltimore, MD
Rolling Green at 2,239,129 Massachusetts Housing Finance 204 12 03/01/12
Amherst Agency (MHFA)/236
Amherst, MA
</TABLE>
I-3
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/97 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Rolling Green at 5,079,447 MHFA/236 404 89 10/10/12
Fall River
Fall River, MA
Troy Manor Apts. 851,433 Farmers Home Administration 50 50 10/29/99
Troy, AL Section 5/Section 8
Westgate Tower Apts. 2,054,781 Michigan Sate Housing Develop- 148 40 12/01/13
Westland, MI ment Authority/236
Wexford Ridge 4,007,754 MSB/236 246 242 09/30/98 (4)
Madison, WI
- -------------------- ------------ -------- --------
Totals(3) 20 $ 88,199,562 3,778 1,294
============ ======== ========
</TABLE>
I-4
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arrowhead Apts. 99% 91% 93% 90% 83% $ 9,044 $ 9,205 $ 9,025 $ 9,282 $ 8,534
Palatine, IL
Beech Hill I 99% 99% 100% 99% 99% 5,672 5,351 5,343 5,352 5,220
Manchester, NH
Beech Hill II 100% 99% 98% 100% 98% 5,098 4,788 4,836 4,411 4,519
Manchester, NH
Chevy Chase Park 97% 97% 99% 98% 100% 4,360 4,232 4,224 3,938 3,953
Centerville, OH
Country Place I 96% 96% 92% 95% 91% 9,330 8,922 8,902 8,783 8,780
Burtonsville, MD
Country Place II 97% 93% 93% 95% 94% 9,484 9,192 8,833 8,965 8,903
Burtonsville, MD
Four Winds West 97% 99% 98% 95% 97% 5,079 4,899 4,537 4,512 5,822
Birmingham, AL
Frenchman's Wharf II 92% 89% 90% 88% 88% 4,681 4,295 4,171 4,156 4,235
New Orleans, LA
Golden Acres 100% 100% 100% 100% 100% 6,495 6,297 6,271 6,191 6,011
Chowchilla, CA
Mercy Terrace 99% 100% 100% 100% 100% 14,801 15,045 15,898 15,585 15,381
San Francisco, CA
The Moorings 94% 97% 97% 97% 97% 9,372 9,231 8,577 8,688 8,078
Roselle, IL
Orangewood Plaza 100% 100% 100% 98% 100% 2,419 2,353 2,700 2,852 2,900
Orange Cove, CA
Posada Vallarta 96% 89% 96% 97% 99% 6,623 6,808 6,616 6,257 5,807
Phoenix, AZ
Princeton Community
Village 93% 98% 97% 97% 98% 7,132 6,785 6,510 6,244 6,072
Princeton, NJ
Rock Glen 99% 97% 94% 96% 95% 5,011 4,724 4,864 4,862 4,778
Baltimore, MD
Rolling Green at Amherst 100% 100% 100% 100% 100% 7,345 7,333 7,314 7,091 6,961
Amherst, MA
</TABLE>
I-5
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rolling Green at 99% 96% 98% 99% 98% 7,233 7,163 7,177 7,222 7,080
Fall River
Fall River, MA
Troy Manor Apts. 100% 100% 100% 100% 100% 4,677 4,680 4,681 4,596 5,261
Troy, AL
Westgate Tower Apts. 98% 100% 99% 98% 99% 3,702 3,551 3,471 3,438 3,261
Westland, MI
Wexford Ridge 97% 98% 98% 100% 100% 4,792 4,509 4,517 4,413 4,182
Madison, WI
---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals(3) 20 98% 97% 97% 97% 97% $ 6,618 $ 6,468 $ 6,423 $ 6,342 $ 6,287
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
I-6
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
(1) All properties are multifamily housing complexes. No single
tenant/resident rents 10% or more of the rentable square footage.
Residential leases are typically one year or less in length, with varying
expiration dates, and substantially all rentable space is for residential
purposes.
(2) The amounts provided are the balances of first mortgage loans payable by
the Local Partnerships as of December 31, 1997.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
(4) The Section 8 contract expiration date reflects a one-year extension from
the original expiration date, in accordance with Federal legislation.
For additional information regarding the real estate of Local Partnerships
in which the Partnership has invested, see Part IV, Schedule III - "Real Estate
and Accumulated Depreciation of Local Partnerships in which Capital Realty
Investors-II Limited Partnership has invested."
On February 19, 1997 and March 18, 1997, the local managing general
partners of Tanglewood II and Deer Grove, respectively, sold the properties.
See the notes to the financial statements for additional information pertaining
to the sales.
As of March 16, 1998, the Partnership's interests in Beech Hill I and Beech
Hill II were held in escrow to be transferred to the purchase money note
holders, at their election, due to the non-payment on the related purchase money
notes. See the notes to the financial statements for additional information.
The local managing general partner has received a purchase offer on Wexford
Ridge. See the notes to the financial statements for additional information
pertaining to the purchase offer.
ITEM 2. PROPERTIES
----------
Through its ownership of limited partnership interests in Local
Partnerships, Capital Realty Investors-II Limited Partnership indirectly holds
an interest in the underlying real estate. See Part I, Item 1 and Schedule III
of Part IV, Item 14 for information pertaining to these properties.
I-7
<PAGE>
PART I
------
ITEM 3. LEGAL PROCEEDINGS
-----------------
On February 10, 1998, the Partnership was served with a complaint by the
two holders of one of the purchase money notes related to Chevy Chase suing the
Partnership, the Managing General Partner and CRHC, Incorporated (CRHC), an
affiliate of the Managing General Partner, for damages and seeking foreclosure
on the Partnership's interest in the Local Partnership. The Managing General
Partner does not expect this litigation to have a material impact on the
financial condition of the Partnership. See the notes to the financial
statements for additional information pertaining to this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
I-8
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) It is not anticipated that there will be any formal market for resale
of interests in the Partnership. As a result, investors may be unable
to sell or otherwise dispose of their interests in the Partnership.
(b) As of March 16, 1998 there were approximately 4,000 registered holders
of limited partnership interests in the Partnership.
(c) For the year ended December 31, 1997, the Partnership made a cash
distribution of $999,100 ($20.00 per Additional Limited Partner unit)
to the Additional Limited Partners on November 4, 1997. The
distribution was a result of the sales of Deer Grove Apts. and
Tanglewood II. No distributions were declared or paid by the Partner-
ship during 1996 or 1995. The Partnership received distributions of
$3,683,465, $996,557 and $870,339 from Local Partnerships during 1997,
1996 and 1995, respectively. Some of the Local Partnerships operate
under restrictions imposed by the pertinent government agencies that
limit the cash return available to the Partnership.
II-1
<PAGE>
PART II
-------
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 3,320,343 $ 303,378 $ 238,823 $ (121,724) $ 343,278
Interest income 346,204 104,989 181,845 125,477 100,172
Expenses (6,526,528) (6,127,668) (6,268,596) (5,605,037) (5,148,865)
Gain on disposition of investments
in partnerships 4,884,825 -- -- -- --
Extraordinary gain from
extinguishment of debt 1,653,096 1,803,902 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 3,677,940 $ (3,915,399) $ (5,847,928) $ (5,601,284) $ (4,705,415)
============ ============ ============ ============ ============
Net income (loss) allocated to
Additional Limited Partners (97%) $ 3,567,602 $ (3,797,937) $ (5,672,490) $ (5,433,245) $ (4,564,253)
============ ============ ============ ============ ============
Net income (loss) per unit of Additional
Limited Partnership Interest based
on 50,000 units outstanding $ 71.35 $ (75.96) $ (113.45) $ (108.66) $ (91.29)
============ ============ ============ ============ ============
Cash distribution per unit of
Additional Limited Partnership
Interest based on 50,000 units
outstanding $ 20.00 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Total assets $ 14,447,030 $ 9,740,065 $ 11,550,373 $ 11,854,627 $ 12,953,688
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase money notes $ 49,093,220 $ 50,725,540 $ 51,676,902 $ 49,371,965 $ 47,346,894
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
-------
The Partnership has invested, through Local Partnerships, primarily in
federal or state government-assisted apartment complexes (the "properties")
intended to provide housing to low and moderate income tenants. In conjunction
with such government assistance, which includes federal and/or state financing
at below-market interest rates and rental subsidies, the Local Partnerships
agreed to regulatory limitations on (i) cash distributions, (ii) use of the
properties and (iii) sale or refinancing. These limitations typically were
designed to remain in place for the life of the mortgage.
The original investment objectives of the Partnership primarily were to
deliver tax benefits, as well as cash proceeds upon disposition of the
properties through the Partnership's investment in local limited partnerships.
Only limited annual cash distributions from property operations were projected
because of the regulatory restrictions on cash distributions from the
properties.
The original investment objectives of the Partnership have been affected by
the Tax Reform Act of 1986, which virtually eliminated many of the incentives
for the new construction or the sale of existing low income housing properties
by limiting the use of passive loss deductions. Therefore, the Managing General
Partner continues to concentrate on transferring the source of investment yield
from tax benefits to cash flow wherever possible and potentially enhancing the
ability of the Partnership to share in the appreciated value of the properties.
The acquisition of interests in certain Local Partnerships resulted in
purchase money note obligations of the Partnership. The purchase money notes
are non-recourse obligations of the Partnership which typically mature fifteen
years from the dates of acquisition of the interests in particular Local
Partnerships.
The Managing General Partner has been working to develop a strategy to sell
certain properties by utilizing opportunities presented by federal affordable
housing legislation, favorable financing terms and preservation incentives
available to nonprofit purchasers. The Managing General Partner intends to
utilize part or all of the Partnership's net proceeds (after a 50% distribution
to limited partners) received from the sales of properties to fund reserves for
paying at maturity, prepaying or purchasing prior to maturity, at a discount
where possible, currently outstanding purchase money notes. The Managing
General Partner believes that this represents an opportunity to reduce the
Partnership's long-term obligations.
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
would qualify within the parameters of a given program and whether these
programs would provide an appropriate economic benefit to the limited partners
of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental Housing Assistance Payments (HAP)
provided by HUD pursuant to Section 8 HAP contracts. Under Section 8 HAP
contracts, HUD guaranteed rental properties a high monthly rental payment for
each low and moderate income apartment unit maintained in the complex. Over the
years, annual increases have pushed rents on many of the Section 8 HAP contracts
above the market rate for comparable non-subsidized properties. In an effort to
deal with the increasing burden of funding Section 8 HAP contracts, many of
which are now expiring, President Clinton signed into law, effective October 1,
1997, the Fiscal Year 1998 HUD appropriations bill which includes Mark-to-Market
legislation. The new legislation allows all Section 8 contracts with rents at
(or reduced to) less than 120% of fair market rents which expire between now and
September 1998 to be renewed for one year. At the beginning of Fiscal Year 1999
(October 1, 1998), all expiring contracts with rents exceeding comparable market
rents and whose mortgages are insured by FHA will be subject to the Mark-to-
Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to
Market would trigger cancellation of debt income to the additional limited
partners, a taxable event, even though no actual cash is received.
Additionally, the newly created second mortgage may accrue interest at a lower-
than-market rate, thereby generating further taxable "income." Proposals to
counter these tax effects have been presented; however, no form of relief has
been approved under IRS regulations at this time. Each property subject to
Mark-to-Market will be affected in a different manner, and it is very difficult
to predict the exact form of restructuring or potential tax liabilities to the
additional limited partners at this time.
In addition to the above, current HUD legislation no longer funds the Low
Income Housing Preservation and Home Ownership Act (LIHPRHA) which had provided
property owners with restricted opportunities to sell low income housing. With
the discontinuation of the LIHPRHA program and the uncertainty of continued
project-based Section 8 subsidies, the Managing General Partner remains
committed to improving operations, increasing efficiency, maintaining and
increasing occupancy, working with state housing agencies where appropriate, and
effectively increasing salability of the properties wherever possible.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. Section 236 and Section
221(d)(3) properties that are in the 18th year of their mortgage may be eligible
for pre-payment of the mortgage. Properties with expiring Section 8 HAP
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
contracts may become convertible to market-rate apartment properties.
Currently, there are a few lenders that will provide financing either to prepay
the existing mortgage or provide additional funds to allow the property to
convert to market-rate units. Where opportunities exist, the Managing General
Partner will continue to work with the Local Partnerships to develop strategies
that make economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
As of December 31, 1997, the Partnership had approximately 4,000 investors
who subscribed to a total of 50,000 units of limited partnership interests in
the original amount of $50,000,000. The Partnership originally made investments
in twenty-two Local Partnerships of which twenty remain at December 31, 1997.
The Partnership's liquidity, with unrestricted cash resources of $7,969,815 as
of December 31, 1997, along with anticipated future cash distributions from the
Local Partnerships, is expected to meet its current and anticipated operating
cash needs. The Partnership has determined that the carrying amount of its cash
and cash equivalents approximates fair value. As of March 16, 1998, there were
no material commitments for capital expenditures.
During 1997, 1996 and 1995, the Partnership received cash distributions of
$3,683,465, $996,557 and $870,339, respectively, from the Local Partnerships.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$18,847,678 (exclusive of unamortized discount on purchase money notes of
$1,488,064) plus accrued interest of $30,245,542 as of December 31, 1997, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $1,050,000 matured on December 31, 1996, and have
been extended. Purchase money notes in an aggregate principal amount of
$1,050,000 and $1,900,000 matured on December 31, 1996 and December 31, 1997,
respectively, and have not been paid or extended. Purchase money notes in an
aggregate principal amount of $2,380,000 matured on January 1, 1998 and were not
paid or extended. Purchase money notes in an aggregate principal amount of
$3,150,000, $6,527,500 and $1,450,000 mature on June 1, 1998, August 31, 1998
and September 1, 1998, respectively. The remaining purchase money notes mature
in 1999 and 2000. See the notes to the financial statements for additional
information pertaining to these purchase money notes.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Partnership's
inability to pay certain of the purchase money note principal and accrued
interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in any of the
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Local Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's exposure to
loss is limited because the amount of the nonrecourse indebtedness of each of
the maturing purchase money notes exceeds the carrying amount of the investment
in and advances to the related Local Partnerships. Thus, even a complete loss
of one of these Local Partnerships would not have a material impact on the
financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes, or
refinancing the respective properties' underlying debt and using the
Partnership's share of the proceeds to pay or buy down certain purchase money
note obligations. See the notes to the financial statements for alternatives
relating to specific properties.
The Partnership has determined that it is not practicable to estimate the
fair value of the purchase money notes, either individually or in the aggregate,
due to: (1) the lack of an active market for this type of financial instrument,
(2) the variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) the excessive costs associated with an independent
appraisal of the purchase money notes.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1997, 1996 and 1995, the receipt of distributions from Local Partnerships was
adequate to support operating cash requirements. Cash and cash equivalents
increased during 1997 as a result of the proceeds from the sales of Deer Grove
and Tanglewood II and the refinancing of the Country Place I and Country Place
II mortgage loans, as discussed in the notes to the financial statements.
Results of Operations
---------------------
1997 Versus 1996
- ----------------
The Partnership's net income increased in 1997 from 1996 primarily due to
gains on the sale of Tanglewood II and Deer Grove during 1997, as discussed in
the notes to the financial statements. Contributing to the increase in the
Partnership's net income was an increase in share of income from partnerships,
primarily resulting from the Country Place I and Country Place II refinancing
proceeds, as discussed in the notes to the financial statements, and an increase
in interest and other income due to higher cash and cash equivalent balances
during 1997. Partially offsetting the increase in the Partnership's net income
was an increase in litigation settlement fee related to the Arrowhead and
Moorings litigation and a decrease in extraordinary gain from extinguishment of
debt due to the Rock Glen purchase money note pay-off during 1996 (both of which
are discussed in the notes to the financial statements), and an increase in
interest expense due to the amortization of imputed interest.
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
1996 versus 1995
- ----------------
The Partnership's net loss decreased in 1996 from 1995 primarily due to the
extraordinary gain on extinguishment of the Rock Glen purchase money note, as
discussed in the notes to the financial statements. Contributing to the
decrease in net loss was a decrease in interest expense which was also due to
the extinguishment of the Rock Glen purchase money note, as discussed in the
notes to the financial statements. Also contributing to the decrease in net
loss was an increase in share of income from partnerships, primarily due to
decreased depreciation and maintenance expense at two properties. Partially
offsetting the decrease in net loss was a decrease in interest income as a
result of decreased cash and cash equivalent balances in 1996 and an increase in
professional fees due to legal fees incurred in connection with the Arrowhead
and Moorings litigation, as discussed in the notes to the financial statements.
The purchase money notes originated from 1983 through 1984. When they were
issued, the market interest rate was approximately 15%, while the stated
interest rates ranged from 9% to 12%. The notes were discounted as required by
Generally Accepted Accounting Principles, and a simple/compound method was used
at the stated interest rate for tax purposes and the compound method at the
market interest rate was used for book purposes. As the book interest is being
compounded, the interest expense for book purposes will eventually surpass the
interest expense for tax purposes, thereby reducing the discount and increasing
the interest expense. In fiscal year 1997, all properties with purchase money
notes that had not previously matured had book interest which exceeded the tax
interest. This increase in interest expense and the resulting reduction in the
discount are expected to continue in future years.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the years ended December 31,
1997, 1996 and 1995 did not include losses of $2,374,778, $3,526,546 and
$3,522,606, respectively. The Partnership's net loss recognized from the Local
Partnerships is generally expected to decrease in subsequent years as the
Partnership's investments in the Local Partnerships are reduced to zero. Accord-
ingly, excludable losses are generally expected to increase. Distributions of
$3,312,477, $247,917 and $248,235, received from nine, eight and six Local
Partnerships, during 1997, 1996 and 1995, respectively, were offset against the
respective years' recorded losses because these amounts were in excess of the
Partnership's investment.
Inflation
---------
Inflation allows for increases in rental rates, usually offsetting any
higher operating and replacement costs. Furthermore, inflation generally does
not impact the fixed rate long-term financing under which real property
investments were purchased. Future inflation could allow for appreciated values
of the Local Partnerships' properties over an extended period of time as rental
revenues and replacement values gradually increase.
II-7
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1997. Combined rental revenue amounts for
years prior to 1997 have been adjusted to reflect property sales of Tanglewood
II and Deer Grove in 1997, as discussed in the notes to the financial
statements.
II-8
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $25,604,498 $25,040,671 $24,798,659 $23,869,482 $23,343,722
Annual Percentage
Increase 2.3% 1.0% 3.9% 2.3%
</TABLE>
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc. incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems Y2K compliant; certain upgrades are already scheduled. The
expense associated with these actions cannot presently be determined, but the
Managing General Partner does not expect it to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
II-9
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and (c)
The Partnership has no directors, executive officers or significant
employees of its own.
(a), (b), (c) and (e)
The names, ages and business experience of the directors and executive
officers of C.R.I., Inc. (CRI), the Managing General Partner of the
Partnership, are as follows:
William B. Dockser, 61, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment properties. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 51, has been President, Secretary and a Director of CRI
since January 1990 and Senior Executive Vice President, Secretary and a Director
of CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business
Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc. and CRIIMI, Inc.
Ronald W. Thompson, 51, is Group Executive Vice President-Hotel Asset
Management. Prior to joining CRI in 1985, he was employed at the Hyatt
Organization where he most recently served as the General Manager of the Hyatt
Regency in Flint, Michigan. During his nine year tenure with Hyatt, he held
senior management positions with the Hyatt Regency in Dearborn, Michigan, the
Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the
Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked
in London, England for the English Tourist Board as well as holding management
positions in Europe, Australia, and New Zealand in the hotel industry. Mr.
Thompson received his education in England where he received a business degree
in Hotel Administration from Winston College.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------------------
Susan R. Campbell, 39, is Executive Vice President and Chief Operating Officer.
Prior to joining CRI in March 1985, she was a budget analyst for the B. F. Saul
Advisory Company. She holds a Bachelor of Science degree in General Business
from the University of Maryland.
Melissa Cecil Lackey, 42, is Senior Vice President and General Counsel. Prior
to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctor degree from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l)
The Partnership has no officers or directors. However, in accordance
with the Partnership Agreement, and as disclosed in the public
offering, various kinds of compensation and fees were paid or are
payable to the General Partners and their affiliates. Additional
information is incorporated herein by reference to Notes 3 and 4 of
the notes to the financial statements contained in Part IV, Item 14.
(h) Termination of employment and change in control arrangements.
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group," as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding
partnership units at December 31, 1997.
III-2
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
-----------
(b) Security ownership of management.
The following table sets forth certain information concerning all
units beneficially owned, as of December 31, 1997, by each director
and by all directors and officers as a group of the Managing General
Partner of the Partnership.
<TABLE>
<CAPTION>
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
<S> <C> <C>
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 persons) None 0%
</TABLE>
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to
change control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or
directors of the Managing General Partner of the Partnership other
than any indirect interest such officers and directors may have in the
amounts paid to the Managing General Partner or its affiliates by
virtue of their stock ownership in CRI. Item 11 of this report, which
contains a discussion of the fees and other compensation paid or
accrued by the Partnership to the General Partners or their
affiliates, is incorporated herein by reference. Note 3 of the notes
to financial statements, which contains disclosure of related party
transactions, is also incorporated herein by reference.
III-3
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship
with entities of which the officers and directors of the Managing
General Partner of the Partnership are officers, directors or equity
owners other than as set forth in the Partnership's response to Item
13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-4
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
------------------------------------------------------
FORM 8-K
--------
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Certified Public
Accountants - Capital Realty Investors-II
Limited Partnership IV-4
Reports of Independent Certified Public
Accountants - Local Partnerships in which
Capital Realty Investors-II Limited
Partnership has invested IV-5
Balance Sheets as of December 31, 1997 and 1996 IV-6
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 IV-7
Statements of Changes in Partners' Deficit for
the years ended December 31, 1997, 1996 and
1995 IV-8
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 IV-9
Notes to Financial Statements IV-10
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report are the
following schedules for the year ended
December 31, 1997, which are applicable to the
Local Partnerships in which Capital Realty
Investors-II Limited Partnership has invested:
Report of Independent Certified Public Accountants
on Financial Statement Schedule IV-29
Schedule III - Real Estate and Accumulated
Depreciation IV-30
The remaining schedules are omitted because the required
information is included in the financial statements and notes
thereto or they are not applicable or not required.
(a) 3. Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K)
Exhibit No. 3. - Articles of Incorporation and bylaws.
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
------------------------------------------------------
FORM 8-K - Continued
--------
a. Certificate of Limited Partnership of Capital Realty
Investors-II Limited Partnership. (Incorporated by
reference from Exhibit 4 to Registrant's Registration
Statement on Form S-11, as amended, dated April 28, 1983.)
Exhibit No. 4. - Instruments defining the rights of security
holders, including indentures.
a. Limited Partnership Agreement of Capital Realty Investors-II
Limited Partnership. (Incorporated by reference from
Exhibit 4 to Registrant's Registration Statement on Form
S-11, as amended, dated April 28, 1983.)
Exhibit No. 10. - Material contracts.
a. Management Services Agreement between CRI and Capital Realty
Investors-II Limited Partnership. (Incorporated by reference
from Exhibit 10B to Registrant's Registration Statement on
Form S-11, as amended, dated April 28, 1983).
Exhibit No. 27. - Financial Data Schedule.
Exhibit No. 99. - Additional Exhibits.
a. Prospectus of the Partnership, dated May 6, 1983
(Incorporated by reference to Registrant's Registration
Statement on Form S-11, as amended, dated April 28, 1983).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
(c) Exhibits
--------
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)3., above.
(d) Financial Statement Schedules
-----------------------------
See Item (a)2., above.
IV-2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
by: C.R.I., Inc.
Managing General Partner
March 27, 1998 by: /s/ William B. Dockser
- ----------------- ---------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 27, 1998 by: /s/ H. William Willoughby
- ----------------- ---------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 27, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
IV-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
------------------------------
PUBLIC ACCOUNTANTS
-------------------
To the Partners
Capital Realty Investors-II
Limited Partnership
We have audited the balance sheets of Capital Realty Investors-II Limited
Partnership as of December 31, 1997 and 1996, and the related statements of
operations, changes in partners' deficit and cash flows for the years ended
December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain Local
Partnerships. The Partnership's share of income or loss from these Local
Partnerships constitutes $7,866 of income in 1997, $55,461 of income in 1996 and
$181,378 of losses in 1995 included in the Partnership's net income or loss.
The financial statements of these Local Partnerships were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amount included for these Local
Partnerships, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Capital Realty Investors-II Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations,
changes in partners' deficit and cash flows for the years ended December 31,
1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Vienna, VA
March 16, 1998
IV-4
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors-II Limited Partnership has
invested were filed in paper format under Form SE on March 26, 1998, in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted January 22, 1998.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 4,737,362 $ 5,962,920
Assets held for sale -- 789,258
Partnership interests held in escrow 917,927 --
Cash and cash equivalents 7,969,815 2,128,849
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $388,811 and $393,948, respectively 432,876 501,003
Property purchase costs, net of accumulated amortization of
$253,580 and $258,870, respectively 298,022 348,378
Other assets 91,028 9,657
------------ ------------
Total assets $ 14,447,030 $ 9,740,065
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 17,359,614 $ 14,981,184
Accrued interest payable 30,245,542 30,584,862
Accounts payable and accrued expenses 80,433 91,418
------------ ------------
Total liabilities 47,685,589 45,657,464
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid in:
General Partners 2,000 2,000
Limited Partners 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners (2,253,712) (1,254,612)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (75,722,867) (79,400,807)
------------ ------------
Total partners' deficit (33,238,559) (35,917,399)
------------ ------------
Total liabilities and partners' deficit $ 14,447,030 $ 9,740,065
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-6
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Share of income from partnerships $ 3,320,343 $ 303,378 $ 238,823
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest income 346,204 104,989 181,845
----------- ----------- -----------
Expenses
Interest 5,664,830 5,552,780 5,759,461
Management fee 249,996 249,996 249,996
Litigation settlement fee 210,000 -- --
General and administrative 206,442 143,529 128,588
Professional fees 145,188 126,118 75,306
Amortization 50,072 55,245 55,245
----------- ----------- -----------
6,526,528 6,127,668 6,268,596
----------- ----------- -----------
Total other revenue and expenses (6,180,324) (6,022,679) (6,086,751)
----------- ----------- -----------
Loss before gain on disposition of investments in
partnerships (2,859,981) (5,719,301) (5,847,928)
Gain on disposition of investments in partnerships 4,884,825 -- --
----------- ----------- -----------
Income (loss) before extraordinary gain from
extinguishment of debt 2,024,844 (5,719,301) (5,847,928)
----------- ----------- -----------
Extraordinary gain from extinguishment of debt 1,653,096 1,803,902 --
----------- ----------- -----------
Net income (loss) $ 3,677,940 $(3,915,399) $(5,847,928)
=========== =========== ===========
Net income (loss) allocated to General Partners (1.51%) $ 55,537 $ (59,123) $ (88,304)
=========== =========== ===========
Net income (loss) allocated to Initial and Special Limited Partners (1.49%) $ 54,801 $ (58,339) $ (87,134)
=========== =========== ===========
Net income (loss) allocated to Additional Limited Partners (97%) $ 3,567,602 $(3,797,937) $(5,672,490)
=========== =========== ===========
Net income (loss) per unit of Additional Limited Partnership
Interest based on 50,000 units outstanding $ 71.35 $ (75.96) $ (113.45)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-7
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit, January 1, 1995 $(1,065,515) $(1,037,855) $(24,050,702) $(26,154,072)
Net loss (88,304) (87,134) (5,672,490) (5,847,928)
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1995 (1,153,819) (1,124,989) (29,723,192) (32,002,000)
Net loss (59,123) (58,339) (3,797,937) (3,915,399)
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1996 (1,212,942) (1,183,328) (33,521,129) (35,917,399)
Cash distribution of $20.00 per unit of
Additional Limited Partnership Interest -- -- (999,100) (999,100)
Net income 55,537 54,801 3,567,602 3,677,940
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1997 $(1,157,405) $(1,128,527) $(30,952,627) $(33,238,559)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-8
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,677,940 $(3,915,399) $(5,847,928)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Share of income from partnerships (3,320,343) (303,378) (238,823)
Gain on disposition of investments in partnership (4,884,825) -- --
Extraordinary gain from extinguishment of debt (1,653,096) (1,803,902) --
Payment of purchase money note interest (587,740) (152,881) (227,722)
Amortization of discount on purchase money notes 3,287,800 3,047,359 3,226,802
Amortization of deferred costs 50,072 55,245 55,245
Changes in assets and liabilities:
Increase in other assets (81,371) (1,806) (2,545)
Increase in accrued interest payable 2,372,875 2,505,421 2,532,659
(Decrease) increase in accounts payable (10,985) 9,094 11,935
----------- ----------- -----------
Net cash used in operating activities (1,149,673) (560,247) (490,377)
----------- ----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships 3,683,465 996,557 870,339
Proceeds from disposition of investment in partnership 5,693,131 -- --
Advances made to local partnerships (148,953) -- --
Repayment of advances to local partnerships 147,250 -- --
----------- ----------- -----------
Net cash provided by investing activities 9,374,893 996,557 870,339
----------- ----------- -----------
Cash flows from financing activities:
Pay-off of purchase money note and related interest (1,385,154) (1,500,000) --
Cash distribution to Additional Limited Partners (999,100) -- --
----------- ----------- -----------
Net cash used in financing activities (2,384,254) (1,500,000) --
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,840,966 (1,063,690) 379,962
Cash and cash equivalents, beginning of year 2,128,849 3,192,539 2,812,577
----------- ----------- -----------
Cash and cash equivalents, end of year $ 7,969,815 $ 2,128,849 $ 3,192,539
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 679,894 $ 152,881 $ 227,722
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-9
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
------------
Capital Realty Investors-II Limited Partnership (the Partnership) was
formed under the Maryland Revised Uniform Limited Partnership Act on March
23, 1983 and shall continue until December 31, 2037 unless sooner dissolved
in accordance with the Partnership Agreement. The Partnership was formed
to invest in real estate by acquiring and holding a limited partnership
interest in limited partnerships (Local Partnerships) which own and operate
federal or state government-assisted or conventionally financed apartment
properties located throughout the United States, which provide housing
principally to the elderly and to individuals and families of low or
moderate income.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which
is the Managing General Partner, and current and former shareholders of
CRI. The Initial Limited Partner is Rockville Pike Associates Limited
Partnership-II, a limited partnership which includes certain officers and
former employees of CRI or its affiliates. The Special Limited Partner is
Two Broadway Associates II, a limited partnership comprised of an affiliate
and employees of Merrill Lynch, Pierce, Fenner & Smith, Incorporated.
The Partnership sold 50,000 units at $1,000 per unit of Additional
Limited Partnership Interest through a public offering. The offering
period was terminated on June 20, 1983.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles.
c. Investments in and advances to partnerships
-------------------------------------------
The investments in and advances to Local Partnerships (see Note 2) are
accounted for by the equity method because the Partnership is a limited
partner in the Local Partnerships. Under this method, the carrying amount
of the investments in and advances to Local Partnerships is (i) reduced by
distributions received and (ii) increased or reduced by the Partnership's
share of earnings or losses, respectively, of the Local Partnerships. As of
December 31, 1997 and 1996, the Partnership's share of cumulative losses of
twelve and eleven of the Local Partnerships, exceeds the amount of the
Partnership's investments in and advances to those Local Partnerships by
$23,324,214 and $28,225,703, respectively. Since the Partnership has no
further obligation to advance funds or provide financing to these Local
Partnerships, the excess losses have not been reflected in the accompanying
financial statements. As of December 31, 1997 and 1996, cumulative cash
distributions of $5,461,043 and $2,148,566, respectively, have been
received from the Local Partnerships for which the Partnership's carrying
value is zero. These distributions are recorded as increases in the
Partnership's share of income from partnerships.
IV-10
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Costs incurred in connection with acquiring these investments have
been capitalized and are being amortized using the straight-line method
over the estimated useful lives of the properties owned by the Local
Partnerships.
d. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all money market funds,
repurchase agreements and commercial paper with original maturities of
three months or less.
e. Offering costs
--------------
The Partnership incurred certain costs in connection with the offering
and selling of limited partnership interests. Such costs were recorded as
a reduction of partners' capital when incurred.
f. Income taxes
------------
For federal and state income tax purposes, each partner reports on his
or her personal income tax return his or her share of the Partnership's
income or loss as determined for tax purposes. Accordingly, no provision
(credit) has been made for income taxes in these financial statements.
g. Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, the Partnership is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
h. Assets held for sale
--------------------
On February 19, 1997, and March 18, 1997, the local general partners
of Tanglewood II and Deer Grove Apts., respectively, sold the respective
properties, as discussed in Note 2. Accordingly, the Partnership's
investments in these Local Partnerships were classified as assets held for
sale on the balance sheet as of December 31, 1996. Assets held for sale
are not recorded in excess of their estimated net realizable value.
i. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 balances to
conform to the 1997 presentation.
IV-11
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
j. Fair Value of Financial Instruments
-----------------------------------
The financial statements include estimated fair value information as
of December 31, 1997, as required by Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosure About Fair Value of Financial
Instruments." Such information, which pertains to the Partnership's
financial instruments (primarily cash and cash equivalents and purchase
money notes), is based on the requirements set forth in SFAS No. 107 and
does not purport to represent the aggregate net fair value of the
Partnership.
The balance sheet carrying amounts for cash and cash equivalents
approximate estimated fair values of such assets.
The Partnership has determined that it is not practicable to estimate
the fair value of the purchase money notes, either individually or in the
aggregate, due to: (1) the lack of an active market for this type of
financial instrument, (2) the variable nature of purchase money note
interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (3) the excessive costs
associated with an independent appraisal of the purchase money notes.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of December 31, 1997 and 1996, the Partnership held limited
partnership interests in twenty and twenty-two Local Partnerships,
respectively, which were organized to develop, construct, own, maintain and
operate rental apartment properties which provide housing principally to
the elderly and to individuals and families of low or moderate income. The
remaining principal amounts due on investments in the Local Partnerships
were as follows.
IV-12
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Purchase money notes due in:
1996 $ 1,050,000 $ 2,100,000
1997 1,900,000 1,900,000
1998 13,507,500 14,800,500
1999 1,340,178 1,340,178
2000 1,050,000 --
Less: unamortized discount (1,488,064) (5,159,494)
----------- -----------
Total $17,359,614 $14,981,184
=========== ===========
</TABLE>
The purchase money notes have stated interest rates ranging from 9% to
12%, certain of which are compounded annually. Unamortized discounts are
based on an imputed interest rate of 15% to reflect market interest rates
which prevailed when the notes were issued. The resulting discount has
been recorded by the Partnership and is being amortized to interest expense
over the life of the respective purchase money notes using the effective
interest method. The purchase money notes are payable upon the earliest
of: (1) sale or refinancing of the respective Local Partnership's rental
property; (2) payment in full of the respective Local Partnership's
permanent loan; or (3) maturity. Purchase money notes in an aggregate
principal amount of $1,050,000 matured on December 31, 1996, and have been
extended to January 2, 2000. Purchase money notes in an aggregate
principal amount of $1,050,000 and $1,900,000 matured on December 31, 1996
and December 31, 1997, respectively, and have not been paid or extended, as
discussed below. Purchase money notes in an aggregate principal amount of
$2,380,000 matured on January 1, 1998 and were not paid or extended, as
discussed below. Purchase money notes in an aggregate principal amount of
$3,150,000, $6,527,500 and $1,450,000 mature on June 1, 1998, August 31,
1998 and September 1, 1998, respectively, as discussed below. The
remaining purchase money notes mature in 1999 and 2000.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that
the underlying properties will have sufficient appreciation and equity to
enable the Partnership to pay the purchase money notes' principal and
accrued interest when due. If a purchase money note is not paid in
accordance with its terms, the Partnership will either have to renegotiate
the terms of repayment or risk losing its partnership interest in the Local
Partnership. The Partnership's inability to pay certain of the purchase
money note principal and accrued interest balances when due, and the
resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's
exposure to loss is limited because the amount of the nonrecourse
IV-13
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
indebtedness of each of the maturing purchase money notes exceeds the
carrying amount of the investment in and advances to the related Local
Partnerships. Thus, even a complete loss of one of these Local
Partnerships would not have a material impact on the financial condition of
the Partnership.
Interest expense on the Partnership's purchase money notes for the
years ended December 31, 1997, 1996 and 1995 was $5,664,830, $5,552,780 and
$5,759,461, respectively. The accrued interest on the purchase money notes
of $30,245,542 and $30,584,862 as of December 31, 1997 and 1996,
respectively, is due on the respective maturity dates of the purchase money
notes or earlier if the Local Partnerships have distributable net cash
flow, as defined in the relevant Local Partnership agreements.
Beech Hill I and II
-------------------
The Partnership defaulted on its purchase money notes aggregating
$2,380,000 related to Beech Hill Development Co. (Beech Hill I) and Beech
Hill Development Co. II (Beech Hill II) on August 1, 1995 when the notes
matured and were not paid. On March 29, 1996, the noteholders agreed to
extend the purchase money note due dates to January 1, 1998. Under the
agreement, the Partnership pays the purchase money noteholders of Beech
Hill I and Beech Hill II all annual cash flow distributions received from
the related Local Partnerships in excess of $5,000 and $2,500,
respectively. The Partnership received cash flow distributions of $5,000
and $2,500 from Beech Hill I and Beech Hill II, respectively, during the
years ended December 31, 1997 and December 31, 1996. Cash flow
distributions of $47,760 and $60,365 were paid directly by Beech Hill I to
the purchase money noteholders during the years ended December 31, 1997 and
December 31, 1996, respectively. Cash flow distributions of $1,369 and
$27,500 were paid directly by Beech Hill II to the purchase money
noteholders during the years ended December 31, 1997 and December 31, 1996,
respectively.
Under the extension agreement, documents transferring the
Partnership's interests in Beech Hill I and Beech Hill II to the
noteholders were placed in escrow to be released to the noteholders upon a
future default by the Partnership on the respective purchase money notes.
On January 1, 1998, the Partnership defaulted on its purchase money notes
related to Beech Hill I and Beech Hill II when the notes matured and were
not paid. The default amount included principal and accrued interest of
$1,480,000 and $1,687,578, respectively, for Beech Hill I and $900,000 and
$1,072,113, respectively, for Beech Hill II. As of March 16, 1998, the
Partnership's interests in Beech Hill I and Beech Hill II have not been
transferred to the purchase money noteholders, and the transfer documents
remain in escrow. As of March 16, 1998, principal and interest totaling
$1,480,000 and $1,715,678, respectively, related to Beech Hill I and
$900,000 and $1,090,570, respectively, related to Beech Hill II were due.
Due to the impending likely transfer of the Partnership's interest in
the Local Partnerships to the purchase money noteholders, the Partnership's
basis in these Local Partnerships, which was $529,429 and $388,498 for
Beech Hill I and Beech Hill II, respectively, was classified as partnership
interests held in escrow as of December 31, 1997.
IV-14
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The purchase money notes related to Beech Hill I and Beech Hill II are
nonrecourse and secured solely by the Partnership's interests in the
related Local Partnerships. The release of the Partnership's purchase
money note obligation as a result of the impending likely loss of ownership
interest in the Local Partnerships will result in a net financial statement
gain of approximately $2.6 million and $1.6 million for Beech Hill I and
Beech Hill II, respectively, during 1998. The federal tax gain is
estimated to be approximately $4.7 million and $3.0 million for Beech Hill
I and Beech Hill II, respectively.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes relating to
Chevy Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes
matured and were not paid. The default amount included principal and
accrued interest of $2,100,000 and $3,553,912, respectively. The Managing
General Partner has successfully negotiated an extension on one of the
purchase money notes (the "First Note") in the principal amount of
$1,050,000 effective December 1, 1997. In connection with the extension
agreement, the Partnership made interest payments totaling $425,000 to the
purchase money noteholder. Under the terms of the extension agreement, the
maturity date will be January 2, 2000. Additionally, the Partnership has
the right and option, but not the obligation, to extend the maturity date
to January 5, 2001 by making a payment to the purchase money noteholder in
the amount of $275,000 on or before January 2, 1999. Such $275,000 payment
shall be applied to accrued interest. The Partnership, if it exercises
this option to further extend the maturity date, shall thereafter have the
option to purchase the purchase money note for $250,000 if it gives notice
of such exercise by January 5, 2000.
As of March 16, 1998, principal and accrued interest due to the second
purchase money note holder totaling $1,050,000 and $1,940,529,
respectively, remain unpaid and unextended. On February 10, 1998, the
Partnership was served with a complaint by the two holders of the
unextended purchase money note suing the Partnership, the Managing General
Partner and CRHC, Incorporated (CRHC), an affiliate of the Managing General
Partner, for damages and seeking foreclosure on the Partnership's interest
in the Local Partnership. The Managing General Partner intends to
vigorously defend this suit; however, there is no assurance that the
Partnership will be able to retain its interest in Chevy Chase. Pursuant
to the First Note extension agreement, this attempted exercise of remedies
by the other noteholder is a default under the First Note. However, if the
litigation is terminated or stayed, or if such noteholders' remedy is
limited to one-half of the collateral securing the purchase money notes
(which is the Partnership's interest in Chevy Chase), such action will be
deemed not to be a default under the First Note. The uncertainty regarding
the continued ownership of the Partnership's interest in Chevy Chase does
not impact the Partnership's financial condition, as discussed above.
Furthermore, since the purchase money note is nonrecourse, the purchase
money note holder is very unlikely to receive any award of damages against
the Partnership as a result of this suit.
The Managing General Partner and the local managing general partner
are jointly exploring various options to refinance the U. S. Department of
Housing and Urban Development (HUD) Section 236 interest rate subsidized
mortgage loan related to Chevy Chase. Additionally, the Managing General
IV-15
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Partner commissioned a rental market study and is evaluating the
feasibility of converting the property to market-rate. No conclusion has
been reached as of March 16, 1998. Additionally, a refinancing cannot be
obtained until the litigation involving the two holders of one of the
purchase money notes is settled, as discussed above. Accordingly, there is
no assurance that the property will be converted nor is there any assurance
that a refinancing of the mortgage loan will occur.
Four Winds West and Troy Manor
------------------------------
The Managing General Partner anticipates negotiating extensions of
purchase money notes relating to Four Winds West Company Limited (Four
Winds West) and Troy Apartments Limited (Troy Manor) in the aggregate
principal amounts of $462,178 and $378,000, respectively. These purchase
money notes are currently due to mature on January 1, 1999. There is no
assurance that an extension will be obtained.
Frenchman's Wharf II
--------------------
The purchase money notes related to Frenchman's Wharf Associates II
Limited Partnership (Frenchman's Wharf II) in the principal amount of
$3,150,000, which were initially due to mature on June 1, 1988, were
extended to mature on June 1, 1998. In conjunction with the four-year
workout agreement for the Local Partnership's mortgage loan, the
Partnership is currently negotiating with the purchase money noteholders to
reach an extension agreement which would be coterminous with the expiration
of the workout arrangement. As of March 16, 1998, the noteholders had not
consented to an extension agreement and there is no assurance that any
agreement will be reached with the noteholders. As such, there is no
assurance that the Partnership will be able to retain its interest in
Frenchman's Wharf II. The uncertainty regarding the continued ownership of
the Partnership's interest in Frenchman's Wharf II does not impact the
Partnership's financial condition, as discussed above.
Rock Glen
---------
The Partnership defaulted on its purchase money note relating to Rock
Glen Limited Partnership (Rock Glen) on August 1, 1995 when the note
matured and was not paid. The noteholder signed a standstill agreement
which expired on October 31, 1995. The Managing General Partner made an
offer to the noteholder to extend the purchase money note due date to
August 2000. This offer was rejected by the noteholder. On January 11,
1996, the Partnership paid off the purchase money note at a discount,
resulting in a gain on extinguishment of debt of approximately $1.8
million.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
The Managing General Partner and trustees representing the purchase
money noteholders related to Roberts Fall River Associates (Rolling Green
at Fall River) and Roberts Amherst Associates (Rolling Green at Amherst)
are currently negotiating to extend the purchase money notes related to
these Local Partnerships, subject to obtaining a satisfactory refinancing
IV-16
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
of the mortgage loans related to the respective Local Partnerships. The
purchase money notes, with aggregate principal amounts of $4,600,000 and
$1,927,500 for Rolling Green at Fall River and Rolling Green at Amherst,
respectively, are currently due to mature August 31, 1998. In connection
with the potential extension of the purchase money notes, the Managing
General Partner, the local managing general partner and the purchase money
noteholders are jointly exploring various options to refinance the
Massachusetts Housing Finance Agency (MHFA) and HUD Section 236 interest
rate subsidized mortgage loans related to these Local Partnerships. The
parties signed a term sheet to restructure the deal, and as of March 16,
1998, the parties are working toward a finalized agreement. There is no
assurance that a finalized agreement will be reached. Further, even if a
finalized agreement is reached, there is no assurance that a satisfactory
refinancing will occur. Accordingly, there can be no assurance that the
Partnership will be able to retain its interest in the Local Partnerships.
The uncertainty about the continued ownership of the Partnership's interest
in the related Local Partnerships does not impact the Partnership's
financial condition, as discussed above.
Tanglewood II
-------------
In conjunction with the sale of the property, on February 19, 1997,
the Partnership paid the purchase money note relating to Tanglewood
Apartments Associates II Limited Partnership (Tanglewood II) at a discount,
as discussed below.
Westgate
--------
Purchase money notes relating to Westgate Tower Limited Dividend
Housing Associates (Westgate) in the principal amount of $1,450,000 mature
on September 1, 1998. The Managing General Partner anticipates negotiating
with the purchase money noteholders for an extension on the purchase money
notes. There is no assurance that the Managing General Partner will reach
an agreement of any kind with the noteholders. Accordingly, there can be
no assurance that the Partnership will be able to retain its interest in
the Local Partnership. The uncertainty about the continued ownership of
the Partnership's interest in the related Local Partnership does not impact
the Partnership's financial condition, as discussed above.
Wexford Ridge
-------------
The Partnership defaulted on the purchase money notes relating to
Wexford Ridge Associates (Wexford Ridge) on December 31, 1997 when the
notes matured and were not paid. The default amount included principal and
accrued interest of $1,900,000 and $3,478,549, respectively. As of March
16, 1998, principal and accrued interest totaling $1,900,000 and
$3,514,623, respectively, were due. The Managing General Partner is
negotiating with the purchase money noteholders for an extension on the
purchase money notes. Additionally, the local managing general partner has
received from a third party a non-binding letter of intent to purchase the
property. There is no assurance that a sale will take place, nor is there
any assurance that the Managing General Partner will reach an agreement of
any kind with the noteholders. Accordingly, there can be no assurance that
the Partnership will be able to retain its interest in the Local
IV-17
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Partnership. The uncertainty about the continued ownership of the
Partnership's interest in the related Local Partnership does not impact the
Partnership's financial condition, as discussed above.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
made by Local Partnerships
--------------------------
The Partnership has a 92.99% to 98.99% interest in profits, losses and
cash distributions (as restricted by various federal and state housing
agencies) of each Local Partnership. An affiliate of the General Partners
of the Partnership is also a general partner of each Local Partnership.
The Partnership received cash distributions from the rental operations and
mortgage refinancings of the Local Partnerships totaling $3,683,465,
$996,557 and $870,339 during the years ended December 31, 1997, 1996 and
1995, respectively. As of December 31, 1997 and 1996, fourteen and
seventeen of the Local Partnerships had surplus cash, as defined by their
respective agencies, in the amount of $2,747,197 and $2,005,402,
respectively, which may be available for distribution in accordance with
their respective agencies' regulations.
The cash distributions to the Partnership from the operations of the
rental properties may be limited by U. S. Department of Housing and Urban
Development (HUD) regulations. Such regulations limit annual cash
distributions to a percentage of the owner's equity investment in a rental
property. Funds in excess of those which may be distributed to owners are
required to be placed in a residual receipts account held by the governing
state or federal agency for the benefit of the property.
Upon sale or refinancing of a property owned by a Local Partnership,
or upon the liquidation of a Local Partnership, the proceeds from such
sale, refinancing or liquidation shall be distributed in accordance with
the respective provisions of each Local Partnership's partnership
agreement. In accordance with such provisions, the Partnership would
receive from such proceeds its respective percentage interest of any
remaining proceeds, after payment of (1) all debts and liabilities of the
Local Partnership and certain other items, (2) the Partnership's capital
contributions plus certain specified amounts as outlined in each
partnership agreement, and (3) certain special distributions to general
partners and related entities of the Local Partnership.
c. Property matters
----------------
The advances, and accrued interest thereon, made to the Local
Partnerships were as follows.
IV-18
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Local Partnership
-----------------
Frenchman's Wharf II:
Principal amount of funds advanced $ 324,410 $ 324,410
Accrued interest on advances 187,372 187,372
----------- -----------
Total $ 511,782 $ 511,782
=========== ===========
</TABLE>
Arrowhead and Moorings
-----------------------
On May 1, 1996, CRHC notified the local managing general partner of
Arrowhead Apartments Associates Limited Partnership (Arrowhead) and
Moorings Apartments Associates Limited Partnership (Moorings) that he was
in default under the Partnership Agreements and threatened to remove him as
managing general partner of the Local Partnerships. The managing agent of
Arrowhead and Moorings, which is an affiliate of the local managing general
partner, filed a petition for arbitration against CRHC seeking, among other
things, a declaration that the allegations set forth in CRHC's notice did
not constitute grounds for removal of the local managing general partner.
CRHC subsequently filed for arbitration against the local managing general
partner seeking his removal. On September 3, 1996, CRHC filed an emergency
petition in the arbitration to have a trustee appointed to serve as local
managing general partner and managing agent of the Local Partnerships until
the arbitration hearings were held. The emergency petition was denied. On
May 7, 1997, the parties reached a settlement whereby the property
management agent was changed and the local managing general partner was
removed from the Local Partnerships in exchange for $210,000. The
settlement was paid by the Partnership and is included as litigation
settlement fee in the accompanying financial statements.
The local managing general partner of the Arrowhead and Moorings
properties has submitted an application to refinance the first mortgages of
the Local Partnerships. The refinancings are expected to close by the end
of the second quarter of 1998. There is, however, no assurance that a
refinancing of the mortgages will be obtained.
Country Place I and II
----------------------
On May 5, 1997, the local managing general partner of Blackburn
Limited Partnership (Country Place I) and Second Blackburn Limited
Partnership (Country Place II) and the Managing General Partner submitted
an application to refinance the first mortgage loans of the Local
Partnerships. On July 18, 1997, the Partnership and the lender signed a
loan commitment and the Partnership paid a $74,250 and $45,000 loan
commitment fee for Country Place I and Country Place II, respectively. On
IV-19
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
August 1, 1997, the local managing general partner closed on the
refinancing loans. In connection with the refinancings, on August 4, 1997,
the Partnership received $1,889,909 and $609,428 related to Country Place I
and Country Place II, respectively. Additionally, on August 14, 1997, the
Partnership received $471,106 and $159,211 which related to the release of
funds held in escrow for Country Place I and Country Place II,
respectively. The refinancing proceeds received by the Partnership during
and subsequent to closing exceeded the Partnership's remaining investments
in the respective Local Partnerships by approximately $3.1 million, and are
included in share of income from partnerships in the consolidated
statements of operations.
Deer Grove
----------
On September 13, 1996, the local managing general partner of
Palatine-Barrington Associates Limited Partnership (Deer Grove) received an
offer to sell the property. The local managing general partner accepted
the offer and on March 18, 1997, Deer Grove sold the property, a 448-unit
apartment complex located in Palatine, Illinois. The sale of the property
generated cash proceeds to the Partnership of $3.4 million at closing. On
June 30, 1997, the Partnership received additional proceeds of $50,000
representing the final release of the property's reserves. The sale
resulted in a net financial statement gain of approximately $3.4 million.
The federal tax gain was approximately $17.8 million.
Frenchman's Wharf II
--------------------
To cover operating deficits incurred in prior years for Frenchman's
Wharf II, the Partnership advanced funds totaling $324,410 as of both
December 31, 1997 and 1996. No advances have been made to Frenchman's
Wharf II since March 1987, and the Partnership does not expect to advance
any additional funds to the Local Partnership. These loans, together with
accrued interest of $187,372 as of both December 31, 1997 and 1996, are
payable from cash flow of Frenchman's Wharf II after payment of first
mortgage debt service and after satisfaction by the Partnership of certain
other interest obligations on the purchase money notes relating to the
Local Partnership. No interest has been accrued since 1992 due to the
uncertainty of future collection. There is no assurance that the Local
Partnership, upon expiration of the workout of its mortgage loan, will be
able to repay the loans in accordance with the terms thereof. For
financial reporting purposes, these loans have been reduced to zero by the
Partnership as a result of losses at the Local Partnership level during
prior years.
The report of the auditors on the financial statements of Frenchman's
Wharf II for the year ended December 31, 1997 indicated that substantial
doubt exists about the ability of the Local Partnership to continue as a
going concern due to the Local Partnership's default on its mortgage and
the expiration of its Section 8 Rental Housing Assistance Payments (HAP)
contract with HUD on November 30, 1998. The uncertainty about the Local
Partnership's continued ownership of the property does not impact the
Partnership's financial condition, as discussed above.
IV-20
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Posada Vallarta Apartments
--------------------------
Posada Associates Limited Partnership (Posada Vallarta Apartments) was
operating under an extension of a mortgage debt workout agreement. The
workout agreement related to Posada Vallarta Apartments provided that upon
cancellation of the workout agreement, the loan would be recast at an
annual interest rate of 7.5%, if certain conditions were satisfied. As of
October 1, 1996, the expiration date of the workout agreement, the local
managing general partner and the mortgagee were disputing whether or not
those conditions had been satisfied. On February 6, 1997, the local
managing general partner and the mortgagee reached an agreement in
principle to recast the loan at a 7.5% annual interest rate with a ten-year
call provision, as stated in the workout agreement. In December 1997, the
parties amended the loan documents to implement this agreement.
Tanglewood II
-------------
On February 19, 1997, Tanglewood II, a 192-unit apartment complex
located in Westwego, Louisiana was sold. The sale of the property
generated net cash proceeds to the Partnership of $933,987. The proceeds
were net of funds used to retire, at a discount, the Partnership's purchase
money note obligation with respect to the property. The sale resulted in a
net financial statement gain of approximately $3.2 million, of which
approximately $1.7 million resulted from the retirement of the purchase
money note obligation with respect to the property. The federal tax gain
was approximately $4.9 million.
d. Affordable Housing Legislation
------------------------------
President Clinton signed the Fiscal Year 1998 HUD appropriations bill
into law, effective October 1, 1997. The new legislation allows all
Section 8 contracts with rents at (or reduced to) less than 120% of fair
market rents which expire between now and September 1998 to be renewed for
one year. At the beginning of Fiscal Year 1999 (October 1, 1998), all
expiring contracts with rents exceeding comparable market rents and whose
mortgages are insured by FHA will be subject to the Mark-to-Market
legislation.
Mark-to-Market implementation will reduce rental income at properties
which are currently subsidized at higher-than-market rental rates, and will
therefore lower cash flow available to meet mortgage payments and operating
expenses. Each affected property will undergo debt restructuring according
to terms determined by an individual property and operations evaluation.
This will involve reducing the first mortgage loan balance to an amount
supportable by the property, taking into account the property's operating
expenses and reduced income. The balance of the amount written down from
the first mortgage will be converted to a non-performing but accruing
(soft) second mortgage. The Section 8 HAP contracts for the following
properties expire during the government's fiscal year 1998.
IV-21
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Units Authorized for
Number of Rental Assistance Under Expiration of Section 8
Property Rental Units Section 8 HAP Contract
-------- ------------ ----------------------- -----------------------
<S> <C> <C> <C>
Beech Hill I 200 39 08/31/98 (1)
Beech Hill II 120 24 08/31/98 (1)
Chevy Chase Park 232 228 03/23/98
Four Winds West 62 62 04/14/98
Frenchman's Wharf II 324 31 11/30/98
Princeton Community Village 239 26 07/01/98
Wexford Ridge 246 242 09/30/98
</TABLE>
(1) As discussed previously, the Partnership's interests in these Local
Partnerships were held in escrow to be transferred to the purchase
money noteholders, at their election, due to non-payment on the
related purchase money notes.
With the uncertainty of continued project-based Section 8 subsidies
for properties with expiring HAP contracts, there is no assurance that
these rental properties will be able to maintain the rental income and
occupancy levels necessary to pay operating costs and debt service. It is
difficult to predict the impact on the Local Partnerships and the resulting
impact on the Partnership at this time.
e. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships at
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996
and 1995 follows.
IV-22
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated
depreciation of $66,719,563 and $71,778,854,
respectively $ 65,117,350 $ 79,183,226
Land 9,387,934 11,322,282
Other assets 16,540,104 16,059,121
------------ ------------
Total assets $ 91,045,388 $106,564,629
============ ============
Mortgage notes payable $ 88,199,562 $ 97,672,239
Other liabilities 22,350,998 29,414,000
Due to general partners 6,891,949 6,681,390
------------ ------------
Total liabilities 117,442,509 133,767,629
Partners' deficit (26,397,121) (27,203,000)
------------ ------------
Total liabilities and partners' deficit $ 91,045,388 $106,564,629
============ ============
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 26,530,666 $ 29,638,904 $ 29,343,786
Interest 547,825 550,964 474,539
Other 671,368 795,885 778,072
------------ ------------ ------------
Total revenue 27,749,859 30,985,753 30,596,397
------------ ------------ ------------
Expenses:
Operating 18,448,594 20,313,779 20,231,119
Interest 7,015,834 8,592,803 8,458,907
Depreciation 4,902,544 5,468,433 5,435,953
Amortization 201,895 78,547 78,173
------------ ------------ ------------
Total expenses 30,568,867 34,453,562 34,204,152
------------ ------------ ------------
Net loss $ (2,819,008) $ (3,467,809) $ (3,607,755)
============ ============ ============
</TABLE>
IV-23
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
f. Reconciliation of the Local Partnerships' financial statement net
-----------------------------------------------------------------
loss to taxable loss
--------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation on the
property as permitted by Internal Revenue Service (IRS) Regulations. These
returns are subject to audit and, therefore, possible adjustment by the
IRS.
IV-24
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
A reconciliation of the Local Partnerships' financial statement net
loss reflected above to the taxable loss follows.
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net loss $ (2,819,008) $ (3,467,809) $ (3,607,755)
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (950,281) (2,013,453) (2,301,340)
Amortization for financial statement purposes
not deducted for income tax purposes 27,383 52,851 33,122
Miscellaneous, net 838,450 2,121,566 1,061,976
------------ ------------ ------------
Taxable loss $ (2,903,456) $ (3,306,845) $ (4,813,997)
============ ============ ============
</TABLE>
3. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the
Managing General Partner a fee for services in connection with the review,
selection, evaluation, negotiation and acquisition of the interests in the Local
Partnerships. The fee amounted to $1,000,000 which is equal to 2% of the
Additional Limited Partners' capital contributions to the Partnership. The
acquisition fee was capitalized and is being amortized over a thirty-year period
using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership. For the years ended December 31, 1997, 1996 and
1995, the Partnership paid $150,443, $109,463 and $84,613, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the statements of operations as general and
administrative expenses.
In addition, in accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (the Management Fee), after all other expenses of the
Partnership are paid. The amount of the Management Fee shall not exceed .25% of
invested assets, as defined in the Partnership Agreement, and shall be payable
from the Partnership's cash available for distribution, as defined in the
Partnership Agreement, as of the end of each calendar year, as follows:
a. First, on a monthly basis as an operating expense before any
distributions to limited partners in the amount computed as described
in the Partnership Agreement, provided that such amount shall not be
greater than $250,000 and;
IV-25
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
b. Second, after distributions to the limited partners in the amount of
1% of the gross proceeds of the offering, the balance of such .25% of
invested assets.
For each of the years ended December 31, 1997, 1996 and 1995, the
Partnership paid the Managing General Partner a Management Fee of $250,000.
The Managing General Partner and/or its affiliates may receive a fee of not
more than 2% of the sales price of an investment in a Local Partnership or the
property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property its owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such amounts were paid to the Managing General Partner and/or its
affiliates during 1997, 1996 and 1995.
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS
All profits and losses prior to the first date on which Additional Limited
Partners were admitted were allocated 98.49% to the Initial Limited Partner and
1.51% to the General Partners. Upon admission of the Special Limited Partner
and the Additional Limited Partners, the interest of the Initial Limited Partner
was reduced to .49%. The net proceeds resulting from the liquidation of the
Partnership or the Partnership's share of the net proceeds from any sale or
refinancing of the projects or their rental properties which are not reinvested
shall be distributed and applied as follows:
(i) to the payment of debts and liabilities of the Partnership
(including all expenses of the Partnership incident to the sale
or refinancing) other than loans or other debts and liabilities
of the Partnership to any partner or any affiliate; such debts
and liabilities, in the case of a non-liquidating distribution,
to be only those which are then required to be paid or, in the
judgment of the Managing General Partner, required to be provided
for;
(ii) to the establishment of any reserves which the Managing General
Partner deems reasonably necessary for contingent, unmatured or
unforeseen liabilities or obligations of the Partnership;
(iii) to each partner in an amount equal to the positive balance in his
capital account as of the date of the sale or refinancing,
adjusted for operations and distributions to that date, but
before allocation of any profits for tax purposes realized from
such sale or refinancing and allocated pursuant to the
Partnership Agreement;
(iv) to the Additional Limited Partners (A) an aggregate amount of
proceeds from sale or refinancing and all prior sales or
refinancings equal to their capital contributions, without
reduction for prior cash distributions other than prior
distributions of sale and refinancing proceeds, plus (B) an
additional amount equal to a cumulative non-compounded 6% return
on each limited partner's capital contribution, reduced, but not
below zero, by (1) an amount equal to 50% of the losses for tax
purposes plus tax credits allocated to such limited partner and
(2) distributions of net cash flow to each limited partner, such
return, losses for tax purposes and net cash flow distributions
commencing on the first day of the month in which the capital
IV-26
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
contribution was made;
(v) to the repayment of any unrepaid loans theretofore made by any
partner or any affiliate to the Partnership for Partnership
obligations and to the payment of any unpaid amounts owing to the
General Partners pursuant to the Partnership Agreement;
(vi) to the General Partners in the amount of their capital
contributions;
(vii) thereafter, for their services to the Partnership, in equal
shares to certain general partners (or their designees), whether
or not any is then a general partner, an aggregate fee of 1% of
the gross proceeds resulting from (A) such sale (if the proceeds
are from a sale rather than a refinancing) and (B) any prior
sales from which such 1% fee was not paid to the General Partners
or their designees and,
(viii) the remainder, 12% to the General Partners (or their assignees),
3% to the Special Limited Partner and 85% to the Initial and
Additional Limited Partners (or their assignees).
Fees payable to certain general partners (or their designees) under (vii)
above, together with all other property disposition fees and any other
commissions or fees payable upon the sale of apartment properties, shall not in
the aggregate exceed the lesser of the competitive rate or 6% of the sales price
of the apartment properties.
In addition, the Managing General Partner and/or its affiliates may receive
a fee in an amount of not more than 2% of the sales price of the investment in a
Local Partnership or the property it owns. The fee would only be payable upon
the sale of the investment in a Local Partnership or the property it owns and
would be subject to certain restrictions, including achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such amounts were paid to the Managing General Partner and/or its
affiliates during 1997, 1996 and 1995.
Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed, not less frequently than annually, 97% to the
Additional Limited Partners, 1% to the Special Limited Partner, .49% to the
Initial Limited Partner and 1.51% to the General Partners after payment of the
Management Fee (see Note 3), as specified in the Partnership Agreement. As
defined in the Partnership Agreement, prior to the establishment of any reserves
deemed necessary by the Managing General Partner and after payment of the
Management Fee, the Partnership's cash available for distribution was
approximately $0, $432,000 and $368,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
On November 4, 1997, the Managing General Partner distributed approximately
$1 million ($20.00 per Additional Limited Partnership Unit) to the Additional
Limited Partners from the proceeds of the sales of Deer Grove and Tanglewood II
to holders of record as of September 30, 1997. No distributions were declared
or paid by the Partnership during 1996 or 1995. The Managing General Partner
intends to retain all of the Partnership's remaining undistributed net sales
proceeds for the possible repayment, prepayment or purchase of the Partnership's
outstanding purchase money notes related to other Local Partnerships.
IV-27
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME (LOSS)
TO TAXABLE INCOME (LOSS)
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations, and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see Note 2g), including
losses in excess of related investment amounts. In addition, adjustments
arising from the imputation of interest on the Partnership's purchase money
notes for financial reporting purposes are eliminated for income tax purposes
(see Note 2a). These returns are subject to examination and, therefore,
possible adjustment by the IRS.
IV-28
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME (LOSS)
TO TAXABLE INCOME (LOSS)
A reconciliation of the Partnership's financial statement net income
(loss) to taxable income (loss) follows.
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 3,677,940 $ (3,915,399) $ (5,847,928)
Adjustments:
Differences between the income tax income (losses) and
financial statement income (losses) related to the
Partnership's equity in the Local Partnerships'
income (losses) 11,650,148 (3,248,881) (4,798,458)
Costs amortized over a shorter period for income
tax purposes (55,911) (59,560) (59,561)
Effect of imputed interest on purchase money notes
for financial reporting purposes 3,241,722 3,035,893 3,031,352
------------ ------------ ------------
Taxable income (loss) $ 18,513,899 $ (4,187,947) $ (7,674,595)
============ ============ ============
</TABLE>
IV-29
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
-----------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
-----------------------------
To the Partners
Capital Realty Investors-II
Limited Partnership
In connection with our audits of the financial statements of Capital Realty
Investors-II Limited Partnership referred to in our report dated March 16, 1998,
which is included in this Form 10-K, we have also audited Schedule III as of
December 31, 1997, 1996 and 1995. We did not audit the financial statements for
certain of the Local Partnerships in 1997, 1996 and 1995, which are accounted
for as described in Note 1c. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
Grant Thornton LLP
Vienna, VA
March 16, 1998
IV-31
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP HAS INVESTED
December 31, 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- -------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
------------------------------- -------------------------------
Building
Description Encum- and Carrying
Operating Properties brances Land Improvements Improvements Costs (B)
- -------------------- ------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Country Place I (A) $ 495,764 $ 6,986,985 $ 559,715 $ --
Burtonsville, MD
(192 units-family
apartment complex)
Frenchman's Wharf II (A) 2,543,310 6,099,825 483,131 --
New Orleans, LA
(324 units-family
apartment complex)
Mercy Terrace (A) -- 12,696,941 1,624,112 --
San Francisco, CA
(158 units-family
apartment complex)
Moorings (A) 623,492 6,358,194 392,276 --
Roselle, IL
(216 units-family
apartment complex)
Posada Vallarta (A) 936,579 -- 15,486,926 1,113,666
Phoenix, AZ
(336 units-family
apartment complex)
Princeton Community (A) 572,228 10,469,952 1,700,552 --
Village
Princeton, NJ
(239 units-family
apartment complex)
Rolling Green at
Fall River (A) 473,263 10,377,418 2,767,164 --
Fall River, MA
(404 units-family
apartment complex)
</TABLE>
IV-32
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP HAS INVESTED
December 31, 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- -------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
------------------------------- -------------------------------
Building
Description Encum- and Carrying
Operating Properties brances Land Improvements Improvements Costs (B)
- -------------------- ------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Wexford Ridge (A) 762,475 6,393,494 64,895 --
Madison, WI ----------- ------------ ------------ -----------
246 units-family
apartments complex)
Sub-total 6,407,111 59,382,809 23,078,771 1,113,666
----------- ------------ ------------- -----------
Aggregate of remain-
ing properties which
are individually less
than 5% of the total
of Column E 2,713,344 38,378,584 10,054,901 95,661
----------- ------------ ------------- -----------
Total $ 9,120,455 $ 97,761,393 $ 33,133,672 $ 1,209,327
=========== ============ ============= ===========
</TABLE>
IV-33
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP HAS INVESTED - Continued
December 31, 1997
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- ----------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Country Place I $ 495,764 $ 7,546,700 $ 8,042,464 $(4,148,943) 1979 6/83 3-35
Burtonsville, MD
(192 units-family
apartment complex)
Frenchman's Wharf II 2,543,310 6,582,956 9,126,266 (5,726,426) 1981 6/83 25
New Orleans, LA
(324 units-family
apartment complex)
Mercy Terrace -- 14,321,053 14,321,053 (7,060,915) 1983 6/83 5-30
San Francisco, CA
(158 units-family
apartment complex)
Moorings 623,727 6,750,235 7,373,962 (3,456,931) 1976 7/83 5-30
Roselle, IL
(216 units-family
apartment complex)
Posada Vallarta 908,458 16,628,713 17,537,171 (5,166,504) 1984 4/83 5-40
Phoenix, AZ
(336 units-family
apartment complex)
Princeton Community 572,228 12,170,504 12,742,732 (6,273,224) 1971 2/84 5-27.5
Village
Princeton, NJ
(239 units-family
apartment complex)
Rolling Green at
Fall River 473,396 13,144,449 13,617,845 (6,774,144) 1975 9/83 5-30
Fall River, MA
(404 units-family
apartment complex)
</TABLE>
IV-34
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP HAS INVESTED - Continued
December 31, 1997
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- ----------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wexford Ridge 762,475 6,458,389 7,220,864 (3,525,192) 1975 9/83 6-40
Madison, WI ----------- ------------ ------------- ------------
246 units-family
apartments complex)
Sub-total $ 6,379,358 $ 83,602,999 $ 89,982,357 $(42,132,279)
----------- ------------ ------------ ------------
Aggregate of remain-
ing properties which
are individually less
than 5% of the total
of Column E 3,008,576 48,233,914 51,242,490 (24,587,284)
----------- ------------ ------------ ------------
Total $ 9,387,934 $131,836,913 $141,224,847 $(66,719,563)
=========== ============ ============ ============
</TABLE>
IV-35
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP HAS INVESTED
December 31, 1997
(A) Secures mortgage loans.
(B) Consists of capitalized construction period interest and real estate
taxes during construction.
(C) The aggregate cost of land for federal income tax purposes is $10,669,897
and the aggregate cost of buildings and improvements for federal income
tax purposes is $149,001,513. The total of the above-mentioned items is
$159,671,410.
(D) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $162,284,362 $160,860,858 $158,911,927
Additions during period 1,229,434 1,602,926 2,304,108
Deletions during period (22,288,949) (179,422) (355,177)
------------ ------------ ------------
Balance at end of period $141,224,847 $162,284,362 $160,860,858
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 71,778,854 $ 66,489,684 $ 61,408,908
Depreciation expense for the period,
net of deletions 4,652,181 5,289,170 5,080,776
Adjustments for sales in current year (9,711,472) -- --
------------ ------------ ------------
Balance at end of period $ 66,719,563 $ 71,778,854 $ 66,489,684
============ ============ ============
</TABLE>
IV-36
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-K.
</LEGEND>
<S> <C>
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